Case against SAC aided by hiring of fired trader

New York Times News Service

Published 7:58 pm, Friday, August 2, 2013

NEW YORK -- Richard S. Lee's first day of running a trading desk was his last.

In March 2008, hours after starting a new job at Citadel, Lee signed into the hedge fund's accounting system and misstated the value of his holdings, according to people briefed on the matter. That effort ultimately would have inflated Lee's returns by about $4.5 million. Citadel, based in Chicago, detected the misconduct and fired him the next morning.

Such a shady move would have blacklisted most traders from Wall Street, but Lee found a new home: SAC Capital Advisors, the Stamford hedge fund run by the billionaire stock picker Steven A. Cohen that federal prosecutors have called a "magnet of market cheaters." Although a Citadel employee and SAC's legal department warned about Lee's past, Cohen, a Greenwich resident, hired him anyway.

An examination of Lee's hedge fund career underscores his importance to the government's criminal insider-trading case against SAC. Federal authorities in Manhattan announced SAC's indictment last week, an unusual, forceful action against a large company.

Lee, who has pleaded guilty and is cooperating with investigators, proved crucial to the government's case -- not so much because of his illicit trading, but because of how he landed a job at SAC despite his earlier misstep. Lee's interview process added to questions about SAC's hiring practices and controls. His cooperation, as well as evidence suggesting that SAC recruited employees with sources inside publicly traded companies, provided ammunition for the government's claim that SAC and its units permitted a "systemic" decadelong insider-trading scheme.

People briefed on the investigation say Lee also possesses a rich vein of information about other illicit activity at SAC, including potential insider trading in the shares of Gymboree, the children's clothing store. The trade, linked to Bain Capital's 2010 takeover of Gymboree, was not cited in the indictment, which said Lee obtained secrets about "various" companies, including "but not limited to" Yahoo and 3Com, a maker of computer hardware and software.

"Richard Lee has accepted responsibility for his prior conduct," said Lee's lawyer, Richard D. Owens of Latham & Watkins. Owens declined to comment on his client's time at Citadel, but a person close to Lee said he did not intend to improperly transfer profits.

It is unclear whether Lee has provided prosecutors with evidence against Cohen, who is not accused of any criminal wrongdoing. Yet the government is still homing in on other former SAC employees, people briefed on the investigation said, and is still trying to build a criminal case against Cohen. In a separate civil case filed last month, the Securities and Exchange Commission accused Cohen of failing to supervise his employees.

Under this cloud of suspicion, SAC is carrying on business as usual, and Wall Street banks continue to trade with the firm.

Over the years, SAC has generated billions of dollars in commissions for brokerage firms and is a Top 5 client on stock-trading desks at most large banks. Banks have also earned big revenues supporting SAC by clearing its trades and financing its operations.

It remains to be seen whether SAC will become a less important client on Wall Street over the longer term. The fund's buying power -- including leverage that stands at about $50 billion -- is expected to drop as investors have asked to withdraw money amid the intensifying investigation. Over the last six months, many investors have cut ties with SAC, with roughly $5 billion of $6 billion in outside money being withdrawn from the fund.

Lee was a former employee whose role in the investigation was not publicly known until last week.

A 34-year-old trader who graduated from Brown University, Lee pursued Wall Street riches after a stint at the Clinton Foundation and at the consulting firm McKinsey, according to public records. His hedge fund career began in 2003 as an analyst for the prestigious firm Farallon Capital Management. Seeking a new role three years later, he interviewed at SAC, but accepted a job at Citadel.

Working from his native Chicago, Lee was part of Citadel's special situations group, placing bets tied to events like product recalls or companies being sued. After two years, when his boss retired, Citadel thrust Lee into a new role atop the desk. The promotion took effect on March 31, 2008.

That evening, as Lee valued existing positions, he edited some of the figures to underestimate his predecessor's returns. That way, the people briefed on the matter said, Lee could collect even greater gains if the position continued to rise, a move that would have increased his pay by $100,000 or more. Within hours, the people said, a colleague flagged Lee's activity.

In April 2009, Lee joined SAC. He did so, prosecutors said, over objections of SAC's lawyers. Cohen "received a warning" from a Citadel employee that Lee belonged to Citadel's "insider trading group," said the government filing.

Citadel, which has not been accused of wrongdoing, said in a statement that "it does not have, and never has had, an `insider trading group.' "

It is unclear how Lee, despite his problems at Citadel, persuaded SAC to hire him, though he had a previous interview experience to draw upon.

In a 2006 interview with SAC, the indictment said, Lee told the fund he routinely relied on so-called expert networks that connect traders with corporate insiders. A senior SAC executive, however, told Lee the fund's top traders typically tapped their own personal network of public company employees for information.